In the papers in part I, dating from 1947 to the present, Dr. Schwartz examines money and banking in the United States and the United Kingdom from a historical perspective. Her investigation of the historical evidence linking economic instability to erratic monetary behavior—this behavior itself a product of discretionary monetary policy—has led her to argue for the importance of stable money, and her writings on these issues over the last two decades form part II. The volume concludes with four recent articles on international monetary arrangements, including Dr. Schwartz's well-known work on the gold standard.
This volume of classic essays by Anna Schwartz will be a useful addition to the libraries of scholars and students for its exemplary historical research and commentary on monetary systems.
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Money in Historical Perspective
By Anna J. Schwartz
The University of Chicago PressCopyright © 1987 The National Bureau of Economic Research
All rights reserved.
The Beginning of Competitive Banking in Philadelphia, 1782–1809
Two capital banks operating in one city ... might, perhaps, act in opposition to each other and, of course, destroy each other. — Pelatiah Webster (1786).
The founders of commercial banking in this country doubted seriously that several banks in one community could get along together, especially that the initial bank could survive if one more intruded upon its domain. They reasoned that each new bank would embarrass the established institutions by drawing on their specie reserves to build up its own. A corollary of this argument for monopolistic banking was that each newcomer must of necessity reduce the profits of the others.
But in Philadelphia, the home of the country's first bank, it was demonstrated — as one rival after another opened its doors in the face of the opposition of older institutions — that competition did not impede their growth. Yet no sooner did a bank win friendly recognition from its elders than it fell prey to the same fear of newcomers. In New York and Baltimore (and possibly also in Boston), as in Philadelphia, a new institution was looked upon as a threat to the security of intrenched banking interests. Only after considerable experience did the banks learn how to minimize the impact of the immediate repercussions of the establishment of another bank, and also how to conduct themselves in their relations with it. This experience, its effects lightened by an expanding demand for bank accommodations and fortuitous accretions to their specie holdings, made the banks generally realize that a competitor's advent did not necessarily mean their eclipse.
In May 1781, when the Continental Congress approved the establishment of the Bank of North America, it recommended that, for the duration of the war, no other banking institution be chartered by any state. There was nothing, however, in the charter granted the Bank of North America in March 1782, to suggest that it had been accorded an exclusive right to banking in Pennsylvania either during or after the war. Yet, for a decade after the war ended, the bank was able to preserve its monopolistic position in both Philadelphia and the state.
Early in 1784 the Bank of North America was faced with the prospect of a rival. The first two years of its existence had been extremely profitable; it paid 8-3/4 percent on its shares in 1782 and 14- 1/2 percent in 1783. This handsome return in itself was sufficient inducement for others to engage in banking, but there was another motive. The closed character of the ownership of the bank's stock and its board membership gave rise to an opposition group among the merchants. Quaker businessmen in Philadelphia were excluded from bank proprietorship and claimed that the directors' partiality to insiders prevented them from obtaining bank loans.
Their demands evidently compelled the Bank of North America to issue more shares. Meeting on January 12, 1784, stockholders agreed to sell one thousand additional shares at $500 each (although the par value of the original shares was $400) and to treat the new and the old shares as equal. If we can judge by what Thomas Willing, the president of the bank, wrote William Bingham, his son-in-law, before the stockholders' meeting, the subscription was intended only for outsiders during the first six months: "... you'll be excluded as well as myself from any more shares before the 1st Aug. next ... unless you get some other person to act for you in the Matter." But when the sale of the new shares started, they were offered to stockholders as well as to the general public.
The terms of the proposed increase in the bank's capital did not cancel plans, announced nine days after the stockholders' meeting, for a new institution, to be known as the Bank of Pennsylvania. Shares were priced at 400 Spanish milled dollars. On February 5, when seven hundred shares had been subscribed and apparently paid for, the holders elected a board of directors, composed mainly of Quaker merchants whom the opposition press satirically dubbed "rigid Presbyterians," "unshaken Quakers," and "furious Tories." On February 10 the subscribers applied to the Assembly for a charter, and the petition was favorably received by the committee to which the matter was referred. When the legislature tabled a request of February 26 by the Bank of North America to be heard in opposition to the new charter, and two days later appointed a committee to bring in a bill, the bank hastily called a stockholders' meeting for March 1.
The meeting passed a resolution increasing the amount of the new subscription from one thousand to four thousand shares and reducing the price to $400. Those who had subscribed to five hundred shares at $500 per share were to be refunded the difference. In a statement to the public — signed by Willing; James Wilson, counsel; Thomas FitzSimons and Gouverneur Morris, stockholders — the original advance in the price of the shares was defended. It was claimed that the price was now reduced not out of private considerations but in the public interest, since a new bank would injure commerce.
The bank's revised stock offer appeased the discontented merchants who had planned forming a rival institution. On March 16, when the bill creating the Bank of Pennsylvania was reached, its directors obtained leave to withdraw their application for a charter. The general subscription to the Bank of North America was so well received that by the end of March its capital, though less than half of the possible $2 million, had more than doubled. One hundred and thirty new stockholders subscribed six hundred shares; the rest were taken by old stockholders or those who had subscribed before March l.
The Bank of North America's anxiety about the scheme to establish another bank cannot be explained simply in terms of the supposed effects that sharing the market would have on its profits, although that apprehension was undoubtedly at the root of its opposition. It also feared for its specie holdings. Subscribers to the proposed Bank of Pennsylvania could pay for their shares with specie in general circulation or with Bank of North America notes. Most of them had chosen the latter. As its notes were at once presented for redemption, the Bank of North America was drained of gold and silver. William Seton, the cashier of the proposed Bank of New York, who was visiting in Philadelphia, wrote to Alexander Hamilton on March 27: "Gold and silver had been extracted in such amounts that discounting was stopped, and for this fortnight past not any business had been done at the bank this way. ... Therefore, for the safety of the community at large, it became absolutely necessary to drop the idea of a new bank, and to join hand in hand to relieve the old bank from the shock it has received."
Hamilton, who had originally favored the incorporation of the Bank of Pennsylvania, now saw the competition in a different light. He wrote Gouverneur Morris: "I had no doubt that it was against the interests of the proprietors; but, on a superficial view, I perceived benefits to the community, which, on a more close inspection, I found were not real." Robert Morris, concluding that there was not enough capital in the country to support several banks, wrote Jefferson on April 8, 1784: "The establishment of so many banks, instead of aiding credits and facilitating operations, will for some time to come have a contrary effect, and it is not without great difficulty that they will each collect a capital sufficient to support its own operations. The struggle to get such capital places these institutions in a degree of opposition to each other injurious to them all."
At the time Morris was writing, exports of specie exceeded imports, owing to an unfavorable balance of trade and the payment of the claims of English creditors for debts contracted before the war. The consequent tightening of the specie supply seemed to confirm his gloomy foreboding that the creation of a new bank would lead to disaster. But he knew, as he indicated two years later, that the flow of specie from this country would soon be reversed. When the balance of international payments shifted in our favor, gold and silver were bound to become more generally available. Morris' argument against a new bank had at best only temporary cogency.
A real fallacy was his assumption that a new bank could obtain specie for its reserve only from the vaults of the preexisting institution. He ignored the fact that only a fraction of the country's specie was held by the Bank of North America; that if a rival drew on its reserve, it could hope that is holdings would be replenished by deposits of gold and silver in the public's possession.
Had the Bank of Pennsylvania's capital consisted entirely of Bank of North America notes and had there been no transfer to it of specie held by the public in strong boxes, the Bank of North America might indeed have suffered by the redistribution of its holdings. But if we assume that the credit supply would have been more rationally distributed when two banks instead of one were in operation, the community might have benefited from the opening of a second bank even if it added no specie to the amount already in vault and the total credit supply remained unchanged.
The proposition against competitive banking generally, as stated by Morris, seems indefensible. Specie kept in strong boxes would have found its way to the new bank, presumably just as it did to the older bank when it increased its capital. If enough capital could not be scraped together for two banks, as Morris asserted, it is difficult to understand how the subscription of the older bank was doubled.
In short, the crux of the Bank of North America's opposition to a potential competitor was concern over its specie holdings, but, had its relations with the Bank of Pennsylvania been amicable, an agreement would have been reached at the outset concerning the acceptance of each other's notes. And the run on the Bank of North America for specie, described by Seton, might have been avoided.
During the decade 1784–93 the Bank of North America modified its attitude. On its own initiative it established good relations with out-of-state banks and submitted, willingly or unwillingly, to the authority of the Bank of the United States. And when the legislature chartered a second bank in 1793, the Bank of North America discovered that its operations were not crippled.
At the same time that it was resisting local bank competition, it was encouraging the founding of banks outside Pennsylvania. To help Boston merchants who proposed opening the Bank of Massachusetts, Willing in January 1784 described his experience in running his bank. In March, Seton went to Philadelphia bearing a letter of introduction from Hamilton to FitzSimons, requesting his advice concerning the operation of a bank.
Thus, while the management of the Bank of North America looked upon another bank in Philadelphia as an interloper, it tolerated banks outside the state, even admitting that they might be useful: first, because subscriptions to a bank in Boston or New York were not likely to be paid for in Philadelphia bank notes that would recoil on the issuer; second, the banks would operate within their own local markets, without affecting the demand for and supply of loans in Philadelphia; third, they would accommodate Bank of North America customers who had payments or collections to make in their vicinity. In contrast to its behavior toward a newcomer in Philadelphia, the Bank of North America's relations with banks in other cities were exemplary.
The smooth course of the organization of the Bank of the United States in 1791 afforded other evidence of how harmoniously the situation might have been managed in Philadelphia in 1784. By opening the subscription books for the national bank, the Bank of North America surprised the skeptics who expected it to be antagonistic; Willing was one of the commissioners. Philadelphians subscribed heavily; some even were disappointed, so keen was the demand for shares. There must have been repercussions on the specie holdings of the Bank of North America, but when Willing was chosen to head the national bank, it became obvious that a modus vivendi would be found. The Bank of the United States opened on December 12, 1791. On February 6, 1792, the Bank of North America adopted a resolution providing for a daily exchange of notes with it and on March 23 one providing for the appointment monthly of a committee of three to consult with a similar committee from the Bank of the United States, "for the purpose of communicating freely upon the business of both, as well to prevent improper interference with each other as to promote the accommodation of the citizens."
The attitude of an elder sister institution toward a newcomer in the local banking field was of crucial importance. Its opposition to the proposed Bank of Pennsylvania in 1784 had caused a crisis in the Bank of North America's affairs. But, because the state bank cooperated, all went smoothly when the first Bank of the United States was organized. Yet it lost some local business as well as the accounts of the federal government, which had been exceedingly profitable. The services the Bank of the United States rendered the merchant business order were acknowledged to be more important than any possible loss its competition might entail.
Whether Bank of North America stockholders suffered is problematical. The bank paid 13-1/2 percent in 1791, 12-1/2 percent in 1792, 12 percent for the next six years, and never less than 9 percent as long as the first Bank of the United States was in existence. However, in July 1792, after an exceedingly good year, the dividend committee of the Bank of North America recommended a payment at a lower rate than the bank's financial situation warranted. Taking for granted that the competition of the new bank would lower profits, it warned that another dividend at a high rate might raise false hopes which would have to be dashed. But the committee had an ulterior motive in urging a low rate: "Another probable consequence of two successive high dividends deserves consideration; would it not be likely to induce others to engage in a business that yielded so large a profit, and if the Legislature of the State had an advantageous offer made to them, would they not be likely to grant another charter?" Preventing the creation of a new bank meant holding the legislature as well as the commercial elements in the community at bay.
At this time a Treasury surplus challenged the attention of Pennsylvania state authorities. After the entire public debt had been liquidated from the proceeds of sales of public lands and paid-up back taxes, a tidy sum remained unappropriated. The high dividends paid on bank stock attracted notice in political quarters. Governor Mifflin on August 13, 1792, proposed to subscribe, on behalf of the commonwealth, to a substantial quantity of Bank of North America stock. On January 29, 1793, the stockholders agreed to admit the state on terms to be set by a committee to be appointed to confer with the governor. Its offer seems to have been a $750,000 subscription at the rate of $400 for each share, half to be borrowed from the bank.
The negotiations were unsuccessful. Merchants, perhaps because they were dissatisfied with their accommodation at the Bank of North America and the Bank of the United States, seized on the political circumstance of the state's search for an investment for its surplus to promote a bank. The state struck a bargain with the new institution, the Bank of Pennsylvania, which it incorporated for twenty years on March 30 and used thereafter as its fiscal agent. To the bank's authorized capital of $3 million the governor subscribed $1 million on behalf of the state, paying part with public stock of the federal government owned by the state at the value fixed by the legislature; part in specie; and the rest with the proceeds of a $250,000 loan from the bank.
Possibly in deference to the view that a competitor would impair the profitability of the Bank of North America, the Bank of Pennsylvania's charter stipulated that two thousand shares at $400 each should be set aside for Bank of North America stockholders, if they decided to relinquish their charter within three months after it was granted. The Bank of North America turned down this suggestion; evidently a year and a half's profitable operation alongside the Bank of the United States had changed its views on competitive banking. It had no cause to regret the decision to retain its identity. "It appears ... that establishment of the Bank of Pennsylvania hath not upon the whole lessened the business, but hath increased it in several departments," reported a committee appointed by the directors of the Bank of North America to examine the possibility of reducing the staff.
Excerpted from Money in Historical Perspective by Anna J. Schwartz. Copyright © 1987 The National Bureau of Economic Research. Excerpted by permission of The University of Chicago Press.
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Table of ContentsPreface
Introduction by Michael D. Bordo and Milton Friedman
I. Money and Banking in Historical Perspective
1. The Beginning of Competitive Banking in Philadelphia, 1782-1809 
2. Money and Business Cycles 
with Milton Friedman
3. Secular Price Change in Historical Perspective 
4. Understanding 1929-1933 
5. A Century of British Market Interest Rates, 1874-1975 
II. Monetary Policy
6. Why Money Matters 
7. How Feasible Is a Flexible Monetary Policy? 
with Phillip Cagan
8. Has the Growth of Money Substitutes Hindered Monetary Policy? 
with Phillip Cagan
9. Clark Warburton: Pioneer Monetarist 
with Michael D. Bordo
10. The Importance of Stable Money: Theory and Evidence 
with Michael D. Bordo
11. Real and Pseudo-Financial Crisis 
12. Has Government Any Role in Money? 
with Milton Friedman
III. International Monetary Arrangements
13. Reflections on the Gold Commission Report 
14. The Postwar Institutional Evolution of the International Monetary System (1983)
15. Alternative Monetary Regimes: The Gold Standard 
16. Lessons of the Gold Standard Era and the Bretton Woods System for the Prospects of an International Monetary System Constitution 
Appendix: Publications of Anna J. Schwartz